Weighing the pros (and cons) of the sparkly green economy

Your grandmother was right — there is no such thing as a free lunch.

Belief in this core principle unites all economists, from conservative Walter Williams to liberal Paul Krugman. It’s a principle (feel free to call it “opportunity cost” while sipping eggnog at your next holiday gathering) that says when you choose to invest a resource in a certain way, you are giving up the value of the next best alternative.

In the case of the proverbial “free” lunch, you are giving up a valuable hour (likely listening to a boring speaker) that you could have spent working, working out, eating with a friend, etc.

I bring this up the concept of opportunity cost having just read the humbly titled, “Renewing America: A Blueprint for Economic Recovery,”a 29-page report released by Environment New Mexico last month.

The gist of this document is that we can dramatically increase the amount of energy that comes from clean renewable sources and achieve energy independence.

But wait, there is more: we can also jumpstart the economy and create millions of new jobs. In short, investment in clean energy is the panacea for our current economic woes.

Now don’t get me wrong. I agree with a fair amount that is included in this statement. However, I believe strongly that you should only make an investment if the benefits exceed the costs. In calculating these costs, you need to consider those pesky opportunity costs.

Consider the example of weatherization cited in the Environment New Mexico statement. Less than one-tenth of 1 percent of American homes are weatherized each year under an existing federal program. Proponents argue that for each dollar invested, there are $1.50 in economic benefits and that by weatherizing all homes in New Mexico and the rest of the country, we can reduce home heating bills by as much as 30 percent.

But whether the required investment of $250 billion to weatherize every American home would be “more than paid for by lower energy bills, reduced pollution, increased energy security, and new jobs and increased economic activity” is an empirical question. It’s a question that’s asserted but unanswered in the statement.

In addition, this analysis ignores the opportunity costs of such an investment. Government resources are limited. Even with tax increases, there will not be enough revenue to provide for every possible program. Is weatherizing every American home the best way to spend our limited resources? What is the value of other programs that cannot be funded if we fund home weatherization? We need more details.

What about the arguments that investment in green energy will create new jobs? It is important to make clear whether we are talking about net new jobs or just new jobs in a particular industry.

In other words, are jobs in the green sector completely new jobs or are they jobs that are lost in another industry? As the statement points out, engineers and accountants work in green industries, but they also work in traditional energy sectors. From a purely “jobs” perspective, does it matter if green energy replaces traditional energy, and the accountants and engineers move between sectors?

This may have implications for different regions of the United States and there may be reasons other than jobs that cause me to prefer the green energy sector, but it is misleading to talk new jobs as opposed to net job creation.

I’m actually highly sympathetic to many of the ideas discussed in this statement. Energy production has external costs are not reflected in market prices. Because prices are too low, we consume excessive (and thus inefficient) amounts of energy. We should devise and promote methods to correct for these external costs.

We should also be clear about the road ahead. Reducing energy use and investing in clean energy has enormous potential, but lets not act as if there are no opportunity costs to clean energy investments.